What’s the saying? You Plan, God laughs. Financial and Investment Planning are Critical, because they let you know whether you are current actions are within the realm of reasonable. But few plans of any kind survive their encounter with the real word.
If you are projecting you income, saving rate, and market returns over the next 20 years, think about all the big stuff that’s happened in the last 20 years that no one could have foreseen:
September 11th, a housing boom and bust that caused nearly 10 Million American to lose their homes.
A financial crisis that caused almost nine Million to lose their jobs, a record-breaking stock-market rally that ensued, and a CORONA VIRUS that shakes the world as I write this.
A plan is only useful if it can survive reality. And a future filled with unknowns is everyone’s reality.
A good Plan doesn’t pretend this weren’t true; it embraces it and emphasizes room for error.
The more you need specific elements of a plan to be true, the more fragile your financial life becomes. If there’s enough room for error in your savings rate that you can say,“ It’d be great if the market returns 8% a year over the next 30 years, but if it only does 4% a year I’ll still be OK,” the more valuable your plan becomes.
Many bets fail not because they were wrong, but because they were mostly right in a situation that require things to be exactly right. Room for Error-often called margin of safety-is one of the most under appreciated forces in finance. It comes in many forms: A frugal budget, flexible thinking, and a loose timeline-anything that lets you live happily with a range of outcomes.
It’s different from being conservative. A conservative is avoiding a certain level of risk. Margin of safety is raising the ODDs of success at a given level of risk by increasing you’re chances of survival. It’s magic is that the higher your margin of safety, the smaller your edge needs to be to have a favorable outcome.